Oracle Shift to Cloud Products Hasn’t Yet Spurred Growth

(Bloomberg) -- Oracle Corp.’s push into the cloud is making progress, but investors will need to be patient before there’s a return to revenue growth.

While the cloud-based business posted a sales increase of 26 percent, the other key units reported declines in the fiscal second quarter ended Nov. 30, the Redwood Shores, California- based company said in a statement Wednesday. Total revenue fell 6.3 percent to $8.99 billion from a year earlier, compared with analysts’ average estimate of $9.06 billion, according to data compiled by Bloomberg. It marked the 10th quarter in the past 12 that the company missed analysts’ sales expectations.

Oracle has been pressured as customers transition from the traditional model of buying software installed on corporate computer systems to products delivered over the Internet. Executive Chairman Larry Ellison has said the shift to cloud is still in the early stages for the industry -- and his company can make gains with new products against rivals such as Workday Inc. and Microsoft Corp.

“You kind of go back and forth through this gray area until we make that full jump to what’s next -- and that’s going to be the cloud,” said John Rizzuto, an analyst at Suntrust Robinson Humphrey Inc.

Cloud Cover

Oracle reported sales in the cloud-based businesses were $649 million in the quarter, contributing 7 percent of total revenue, compared with 5 percent a year earlier. Sales growth -- based on constant currency -- for key cloud products is expected to accelerate to about 60 percent in the fiscal fourth quarter, an increase from 38 percent in the past quarter, and drive gross margins higher, Co-Chief Executive Officer Safra Catz said in the statement.

Catz also forecast adjusted profit -- based on constant currency -- of 63 cents a share to 66 cents a share for the current quarter and 83 cents to 86 cents for the fourth fiscal quarter. Revenue is projected to increase zero to 3 percent in the current quarter and 1 percent to 3 percent in the fiscal fourth quarter.

Oracle shares fell as much as 1.7 percent in extended trading after closing at $38.91 in New York. The company has declined 13 percent this year.

The shift to Web-based products is succeeding in key corporate business areas such as enterprise resource planning, the software that helps manage many core back-office functions for clients, Ellison said during a conference call with analysts.

“We expect that our rapidly growing cloud business will drive Oracle’s overall revenue and overall profit growth for years and years to come,” he said.

Cloud Products

In October, Oracle said it would begin rolling out a new service that enable users to rent computing power by the hour or month, taking direct aim at Amazon.com Inc.’s cloud-computing service that is now a multibillion-dollar business. Oracle’s cloud-related revenue is recognized differently than traditional agreements -- accruing over time and delivering more over the long term. For example, a $1 million licensing deal is worth about $3 million over 10 years, compared with about $10 million for an equivalent cloud deal, Catz said in June.

Oracle reported $1.68 billion in revenue from new software licenses, a decline of 18 percent from a year earlier. Analysts watch that number for insight into how well the company can sell new products and services to first-time customers and existing clients. Revenue from software-license updates and product support fell 1.8 percent to $4.68 billion. Sales in the company’s hardware division dropped 16 percent to $1.12 billion.

Net income in the second quarter declined 12 percent to $2.2 billion, or 51 cents a share. Still, profit excluding certain items was 63 cents compared with estimates of 60 cents.

Separately, Oracle said it appointed Renee James, outgoing president of Intel Corp., as a director, increasing the size of the board to 13 members.